Boeing (BA) has been in the news a lot since the last year. The company's stock has been trading at its two-year high, mostly on the back of new orders, while it is facing a lot of uncertainty because of the company's grounded 787 Dreamliner. Let us analyze the company to see how its short-term and long-term future looks.
Boeing earns its revenues from three segments. The first segment is Commercial Airplanes - comprising revenue earned from developing, producing and marketing commercial jet aircraft. The models currently in production include the 737, 747, 767, 777 and 787 series. Over the last four years, the contribution of this segment as a percentage of total revenues for Boeing has been steadily increasing. In the year 2009, this segment had contributed approximately 50% of the company's total revenues, while this number in 2011 was 53% and in 2012 was a little more than 60%.
The second segment of the company is the 'Boeing defense space and security' segment, comprising revenues earned from research, development, production, modification and support of manned and unmanned military aircraft, weapon systems, electronics and information systems among various other such products. The United States government is the biggest customer of Boeing in this segment, and the revenue earned from this segment has been flat for the last few years (between $31,000 to $33,000). The last segment of the company is Boeing Capital, which primarily includes revenues earned from providing selective financing solutions for Commercial Airplanes customers and government customers.
The only concern I can see from the Boeing defense space and security segment is that 33% of the company's revenues are from U.S. government contracts and that any significant change in regulations may affect the company's revenues. However, the market has been more keenly following the story behind the 787 Dreamliner. The 787 Dreamliner, launched in September 2011, is a long-range midsize airplane that is reportedly 20% more fuel efficient, has mostly electrical flight systems and generates less sound than similar airplanes. The company had received more orders from launch to roll-out date than it had for any previous model. However, in January this year, Japan's All Nippon Airways flight caught a minor fire in the battery, and another Japan Airlines flight also had a battery fire while parked at an airport. The company also faced complaints such as that of a fuel leak in the 787. Following the incidents, Japanese airlines All Nippon Airways voluntarily grounded the Dreamliner fleet on safety grounds. Very soon, the U.S. Federal Aviation Administration (FAA) issued an emergency airworthiness directive grounding the 787 series. The U.S. National Transportation Safety Board also initiated a safety probe simultaneously.
Boeing had announced that it was stopping the deliveries of 787 until the battery problem was resolved. Boeing has carried out extensive tests but as yet has been unable to ascertain the cause of the fires. In order to expedite the launch of 787, the company has tried to make changes in the battery system and add more safety features to it. However, it remains to be seen if FAA is convinced by the additional safety features, even though the company has not been able to find out the root cause of the problem.
The cost of finding out the root cause of the battery problem will continue to accrue unless Boeing can come up with a satisfactory answer to the problem. And depending on how long it takes, the cost will go on increasing. Addition to this cost, will be the cost to correct the problem. It may be at the design level, or it may need to make changes to the system. Then these alterations will need to be made to the already delivered airplanes and also already manufactured airplanes. Boeing will also face delivery hold up for the new airplanes, and it will not receive any payments from various airlines unless it starts delivering the 787. Thus, in the short term, the company's cash flow may be affected too.
Issues with unions
According to the company's 10-k, Boeing's contracts with major unions, representing approximately 35% of the company's work force, are to be negotiated in the next three years. There have been multiple reports indicating that there is a high probability of a potential strike at Boeing, and management has so far been successful in avoiding one. However, with these contract negotiations in the coming three years, the possibility of a strike remains fairly probable.
Airbus, the second largest airlines manufacturer in the world behind Boeing is looking to capitalize on the 787 mishaps. Although it is yet to make its first flight, the company has already got 600 orders. Airbus A 350, is in direct competition with Boeing 787 Dreamliner. In fact, although Boeing started the operations of 787 earlier than Airbus, it has in a way benefited Airbus since many of the technologies on both plane are similar. For example, after the battery problems faced by Boeing, Airbus decided to not use the lithium-ion cells used by Boeing, which are a 60kgs lighter, and will use nickel cadmium battery technology. Thus although, because of its early launch, Boeing has got approximately 250 more orders than Airbus, it remains to be seen if in the long term it proves costly or not. However, the airlines industry in general is expected to do well in the coming years, especially because of improving macro economic conditions. According to the Aerospace Industries Association, commercial airplane sales in 2013 will go up by almost 11%. Global air traffic is estimated to grow at 5% for the next 20 years, while the total value of deliveries of airplanes is expected to be $4.5 trillion. In fact, even Boeing had issued a press release in early March indicating that it was pushing production rates higher because of strong demand and a healthy backlog.
Sell now - Buy later
Interestingly, the stock price of Boeing has risen since January this year. The stock is trading at a five-year high at $86. It seems that the investors have faith in the company's ability to avoid major problems due to the technical failures being faced by 787. However, I feel that there will definitely be an effect on the financial performance of Boeing due to various costs involved with the 787 Dreamliner. This is not reflected in the stock price as yet. There is a good possibility of the stock price falling in the near future (one-year visibility). However, because of a lack of major players, (except for Airbus), coupled with the rise in the aviation industry, Boeing's investors should not be too concerned about the company's long-term prospects. For those who want to exit, now seems a good time. While those who want to invest should wait for a potential fall in the stock price.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.